Frequentis : Consolidated Financial Statements and Group Management Report 2022

56				Frequentis Group
			Annual Report 2022

Group Management Report as at 31 December 2022

				Frequentis Group
136		Group Management Report as at 31 December 2022		Annual Report 2022

Economic environment

Compared to other sectors of the economy, the areas in which the Frequentis Group operates (information and communication systems for civil and military air traffic control, emergency services, rail and water transport) have relatively low cyclical exposure. Frequentis' business performance would be adversely affected by a significant global decline in one of these five areas. Frequentis cannot completely avoid general economic developments. However, it supplies safety-critical infrastructure, which cannot be dispensed with and has to be upheld and maintained even in periods of crisis.

The International Monetary Fund (IMF) published its World Economic Outlook Update in January 2023.1 Despite the pandemic, it estimated that global GDP grew by 3.4% in 2022 and forecast growth of 2.9% for 2023. The forecast for 2023 is 0.2 percentage point higher than predicted in October 2022 but is below the historical (2000 -2019) average of 3.8%. The rise in central bank rates to fight inflation and Russia's war in Ukraine continue to weigh heavily on economic activity.

The rapid spread of COVID-19 in China dampened growth in 2022 but the recent reopening has paved the way for a faster-than-expected recovery. The balance of risks remains tilted to the downside, but adverse risks have moderated since the World Economic Outlook Update of October 2022. Global inflation looks set to fall from 8.8% in 2022 to 6.6% in 2023 and 4.3% in 2024. However, that would still be above the pre-pandemic level of around 3.5% (2017-2019).

The IMF estimates that the US economy grew by 2.0% in 2022 (2023:1.4%). Further, it anticipates that growth in the euro zone was 3.5% in 2022 (2023: 0.7%). For the major economies in the euro zone it predicts different growth rates in 2022 and 2023: the growth projections for 2022 are 1.9% for Germany (2023: 0.1%), 2.6% for France (2023: 0.7%), 3.9% for Italy (2023: 0.6%), and 5.2% for Spain (2023: 1.1%). The forecast for the UK is 4.1% growth in 2022 (2023: -0.6%).

For the emerging and developing economies in Asia, the projection is 4.3% growth in 2022 (2023: 5.3%). The IMF estimates that Latin America grew by 3.9% in 2022 (2023: 1.8%). The projection for the Middle East and Central Asia is 5.3% growth (2023: 3.2%).

1https://www.imf.org/en/Publications/WEO/Issues/2023/01/31/world-economic-outlook-update-january-2023

Frequentis Group
Annual Report 2022	Group Management Report as at 31 December 2022	137

Business performance

The operating business was still held back to some extent by the COVID-19 pandemic, which subsided during 2022. The war in Ukraine, which started in February 2022, indirectly impacted the Frequentis Group through higher inflation (initially for electricity, gas, and fuels). Inflation then filtered through to the cost of goods sourced from suppliers, salary rises, and thus earnings.

Revenues rose, partly due to the companies acquired from L3Harris Technologies during 2021, which were included in the financial statements for the full year in 2022, and the acquisition of the Italian company Regola in January 2022. Thanks to Frequentis' stable business model as a provider of communication and information systems for control centres in the safety-critical sector, demand remains high, as shown by the increase in order intake.

Significant events in 2022

Acquisition of Regola

On 5 January 2022, Frequentis acquired a 51% interest in Regola S.r.l. (based in Turin, Italy). This Italian company's innovative software solutions complement Frequentis' public safety product portfolio and therefore support its long-term growth strategy in this business domain.

Frequentis and Regola supply integrated control room solutions to improve the response of emergency services. Regola's command and control (CAD) solutions complement Frequentis' portfolio in the area of public safety and adjacent markets. Its main product is the UNIQUE CAD product family, accompanied by products offered on a software-as-a-service basis. The aim is to step up international marketing.

Frequentis' strategy includes searching proactively for attractive M&A opportunities to extend its product portfolio or gain access to new markets.

Investment in Aviamaps

In September 2022, Frequentis acquired a 25% stake in the Finnish software producer Aviamaps Oy. This company's software enables users of its platform to book drone flights directly online by clicking on a map (real-time aviation maps platform). This platform is a user-friendly flight planning and airspace management tool. In 2023, Aviamaps' software will be integrated into the Frequentis solution for automatic approval of drone flights in Austria. Frequentis has worked with this company on drone research projects in the past.

75th-year anniversary of Frequentis

In 2022, Frequentis celebrated its 75th anniversary. From its origins as a small company - what would be called a start-up today - founded by two ambitious engineers in post-war Vienna in 1947, it grew first into a medium-sized company and eventually into a successful global group of companies.

The distinctive culture with a safety-critical focus plays a key role in the success of the Frequentis team. 75 years of experience with projects in the safety-critical sector have resulted in extensive expertise and a deep understanding of customers' needs. Frequentis intends to continue to use this knowledge on the world's markets in the future - wherever the mission is to protect people and property.

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138		Group Management Report as at 31 December 2022		Annual Report 2022

Impact of the geopolitical situation

Almost concurrently with the weakening of the COVID-19 pandemic, war broke out in Ukraine in Eastern Europe. As well as causing immense local suffering, this affected Frequentis' internal and external stakeholders in many ways.

The war in Ukraine did not have a relevant impact on Frequentis' revenues because total revenues generated with Ukraine, Russia, and Belarus in 2022 were less than EUR 100 thousand. Indirectly, it resulted in higher prices, especially for electricity, gas, and fuels. Consequently, prices of other everyday products rose, so inflation increased sharply almost everywhere in the world and was well above the average of recent years. This resulted in the need to adjust prices for existing and new customer projects. The inflation-related salary adjustments under individual and collective salary agreements are reflected in the Frequentis Group's personnel expenses in both 2022 and 2023.

Frequentis was affected to some extent by supply chain bottlenecks and, in some cases, sharp increases in procurement prices and delivery delays. The increase in inventories was mainly due to increased stocking of components to ensure an adequate safety net to meet long-standing delivery and maintenance obligations despite the withdrawal of products by producers and supply bottlenecks.

Impact of the COVID-19 pandemic

From March 2020, Frequentis had an internal coronavirus crisis team. This was an interdisciplinary team composed of representatives of relevant departments and headed by the Chairman of the Executive Board. The crisis team met at regular intervals, depending on the course of the pandemic, to evaluate the situation and define the action to be taken.

The measures were scaled back from early summer 2022 as the pandemic subsided, but some general precautions such as mandatory testing of participants at large meetings remained in place until the end of the year.

The principal areas of action that enabled Frequentis to navigate the COVID-19 pandemic well were health & safety and facility management, plus increased use of digital technologies, both internally and with customers and partners.

Important factors in this were customers' strong confidence in Frequentis, while their flexibility and creativity supported the ability to find good solutions. Despite the ongoing travel restrictions, it was therefore possible to continue to work on projects remotely (via video conferences) and perform acceptance procedures.

Frequentis' corporate culture permitted mobile working practices before the pandemic (working from home or on-site at customers' premises), so both employees and the existing IT infrastructure handled the extensive shift to working from home very well.

Experience during the pandemic provided some key lessons that can be used for Frequentis' long- term sustainable development. The findings and experience include important impetus for more extensive use of digital opportunities such as modifying processes and tools to optimise remote working and to drive forward product innovations.

Frequentis Group
Annual Report 2022	Group Management Report as at 31 December 2022	139

Order intake

Order intake in the Frequentis Group was EUR 404.8 million in 2022, an increase of 21.5% (EUR 71.6 million) compared with 2021, when order intake was EUR 333.2 million.

The distribution of order intake between the two segments in 2022 was as follows: Air Traffic Management 68% (EUR 275.4 million) compared with 69% in 2021 (EUR 230.4 million), Public Safety & Transport 32% (EUR 129.4 million), compared with 31% in 2021 (EUR 102.8 million).

Highlights of order intake in the Air Traffic Management segment

Frequentis' Air Traffic Management segment acquired a wide variety orders across its product range from all over the world.

Demand for remote digital towers remains consistently high. The French air navigation service provider, DSNA (Direction des Services de la Navigation Aérienne), has placed an order with Frequentis to supply its state-of-the-art remote digital tower solution for France.

In the area of drones, the Australian air traffic control organisation has selected Frequentis to participate in the tender procedure for the country's first Flight Information Management System (FIMS). This system will support the secure integration of drones as emerging airspace users into Australia's low-altitude airspace.

The Austrian air navigation service provider Austro Control and Frequentis have started to build a digital traffic management solution for secure integration of drones into Austrian airspace.

The German armed forces have awarded Frequentis a contract to deliver IT equipment for the National Air Defence command centre. The Frequentis command and control system will support the "National Situation and Command Centre for Security in Airspace" in securing German airspace. With the support of this system, security-critical scenarios such as unauthorised intrusion into airspace, aircraft hijackings, and terrorist attacks can be handled efficiently and effectively.

The Royal Netherlands Airforce has decided to replace its three existing voice communication systems (VCS) with a single system. In the international selection procedure, the Frequentis Secure VCS proved the safest, most suitable, and most economically advantageous solution.

Highlights of order intake in the Public Safety & Transport segment

In the Public Safety & Transport segment, the Public Safety business domain increased its market leadership with the emergency services in Germany by securing an order to supply a system to connect the emergency rescue services and fire brigades to the safety-critical digital communication network in the federal state of North Rhine-Westphalia as well as an order for an integrated control centre solution for the federal state of Saarland.

In the Public Transport business domain, orders were mainly secured from the installed base in Europe. As well as orders for releases and upgrades, these include add-on and maintenance contracts.

Through an innovation partnership with Austrian Federal Railways, Frequentis is working on hangar- based drone operations. Routine maintenance flights by drones could quickly detect damage to infrastructure or hazards in the vicinity of the track so they can be dealt with swiftly.

In the Maritime business domain, Frequentis acquired an order to upgrade the control centre communications for the coastal surveillance (search and rescue) services in Australia and Iceland, as well as orders from the installed base, for example from the Dutch coastal surveillance organisation.